As a first time home buyer, you might feel overwhelmed by the various financing options in the market. Choosing the best mortgage solution requires thorough research. Making an informed decision will save you thousands of dollars over the life of the mortgage.
If you’re buying a house for the first time, the following guidelines will help you navigate the complex mortgage landscape:
The first step lenders take when you apply for financing is to analyze your credit report. Your score plays a major role in determining your interest rate and the kind of house you can afford. The higher your FICO score, the lower you’ll pay in total interest. While shopping for a mortgage, it’s advisable to present copies of your latest credit report to potential lenders. Having it pulled several times by different lenders could negatively affect your score.
The more quotes you get from lenders, the higher the likelihood of saving on various mortgage fees. Consider getting a pre-approval before shopping for a house, because it shows potential sellers that you’re serious about buying. Because servicing a mortgage is a long term commitment, make sure you’re financially prepared. Try to keep your debt-to-income (DTI) ratio as low as possible. Lenders prefer a DTI of 36% or lower. Some are known to extend mortgage facilities to applicants with DTIs of up to 43%.
Due to juicy offers from lenders, you might find yourself considering buying a more expensive house than you initially wanted. No matter how tempted you are, stick to a mortgage plan that you can service comfortably. Your down payment also determines how you service your home loan. Although most lenders expect you to have at least 20%, some will accept a lower down payment. If you qualify for specialized loans such as USDA and VA, you don’t have to make this initial commitment.
Buying a house involves more than paying its list price. Closing costs make up a small but significant portion of the total amount you’ll spend. These one-time expenses include title insurance, property tax, home insurance, and prepaid daily interest charges.
Other common expenses are loan origination, property appraisal, home inspection, survey, underwriting, and attorney fees. There are various ways of reducing closing costs. Other than comparing lenders’ cost estimate forms, you can ask the seller to cover some of these fees.
Signing loan papers at the end of the month also reduces the amount of prepaid interest you pay. Although some lenders offer “no-closing costs” mortgages, you should approach them with caution. Some include the supposedly waived costs in your mortgage in the form of hidden fees, ultimately charging you more.
Since you’re applying for a loan, you must convince potential lenders that you’re capable of servicing it. Other than identity documents, you’ll be required to show your income, employment status, and debt obligations. You’ll also be asked about your tax returns, investments, and marriage situation, among other details. Lenders use this information together with your credit report. They can estimate with more accuracy whether you’ll be able to pay a mortgage if you qualify for one.
There are various mortgage insurance options depending on the type of financing you qualify for. They include Private Mortgage Insurance (PMI), qualified mortgage insurance premium, mortgage title insurance, and mortgage protection life insurance. Lenders usually require you to buy PMI if your down payment is less than 20%. You can request to cancel this policy once you’ve paid at least 20% of the mortgage’s principal balance.
If you qualify for an FHA mortgage, you’ll be required to buy a qualified mortgage insurance premium. Most lenders will insist on it regardless of the size of your down payment. A mortgage title insurance protects you against loss in case your new property’s title is later found to have problems. Before closing, a title search is done to verify that the home is really owned by the person who’s selling it. It also uncovers any tax-related lien placed on the property. While mortgage protection life insurance is offered with the paperwork, you don’t have to sign up for it.
If you’re willing to pay higher monthly installments, you can pay off your mortgage faster. Although most standard home loans last up to 30 years, you can apply for a 15-year mortgage. The shorter the period, the more you’ll save in interest.
By following these tips, your first time home buying experience will be a memorable one. You’ll also have a smooth mortgage payment process free of the stress that the newest buyers feel. Stacy knows all the cool ideas you need for relaxed, affordable, and sophisticated living.